In the modern era of 401(k) lawsuits, much of the focus has been on one topic: fees. That includes fees for investments, record keeping and other services. This variety of 401(k) lawsuits – with more than 100 filed in 2020 – might be viewed as “401(k) litigation 1.0.” However, we are now well into 401(k) litigation 2.0.
While plaintiffs continue to develop many theories and new claims, one type of claim that has appeared with increasing frequency in 401(k) litigation 2.0 is an allegation that deciding to offer additional services to plans and their participants creates conflicts. Why now?
Over the past 20 years, two significant and somewhat seemingly conflicting trends have taken over the retirement services industry – unbundling and consolidation. In the 1990s, it was very common for one vendor to provide record keeping, investments and all services to a plan. In the 2000s and 2010s, an increasing number of plans shifted to an unbundled model, in which different parties provided products and services. At the same time, the vendors offering services to 401(k) plans have consolidated through mergers and acquisitions. These mergers and acquisition have created an environment where vendors may only be providing one or a few services to a plan, but they have a number of additional offerings.
In addition, given the Obama administration’s focus on “service provider” conflicts, as refined in the last year of the Trump administration and now in the early years of the Biden administration, potential “conflicts” are more top of mind across the retirement industry than ever.
Although some lawsuits assert that offering more than one service is itself an automatic, impermissible conflict, there is far more texture to consider, such as whether a person is a plan sponsor, adviser or other service provider.
First, under the Employee Retirement Income Security Act, there are specific prohibited transaction rules – and exemptions to prohibited transactions. These exemptions range from statutory exemptions to prohibited transactions in ERISA itself, to regulatory exemptions – such as the Department of Labor’s Prohibited Transaction Exemption 2020-02 that recently went into effect, to “individual” exemptions requested and obtained by specific parties from the DOL. The statutory exemption most commonly considered is ERISA section 408(b)(2), which allows for the payment of reasonable compensation to a service provider.
Second, decisions, even if not prohibited transactions, need to satisfy prudence and loyalty standards under ERISA section 404.
Although there is no one foolproof way to avoid being drawn into litigation, as advisers increase their service offerings, it may be helpful to look carefully at ERISA’s prohibited transaction and fiduciary standards of loyalty and prudence as they develop and modify their innovative offerings. As these trends continue, it will likely be important for service providers to be able to articulate why the additional services are likely to benefit the participants and beneficiaries of the plans they support.
David Levine is a principal at Groom Law Group and co-chair of the firm’s employer-focused practice.
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